Guidance published by HMRC in its Corporate Finance Manual has recently been updated to reflect a change in practice regarding the corporation tax treatment of debt for equity swaps.

Debt for equity swaps are commonly used in corporate restructuring, particularly when a company is in financial difficulty. They may also be encountered in the termination of joint venture arrangements where, prior to the sale of shares in the joint venture company by one co-venturer to the other, the parties wish to convert any loans made to the company into shares.

In Lehman Brothers International (Europe)(in administration) v CRC Credit Fund Limited & Ors [2010] EWCA Civ 917 the Court of Appeal considered the first instance judgment of Mr Justice Briggs on the operation of the Client Money Rules (CASS) in relation to the insolvency of Lehman Brothers International (Europe)(LBIE).

On August 2, the English Court of Appeal handed down its judgment on the client money directions application made in the Administration of Lehman Brothers International (Europe) (LBIE). The Court of Appeal overturned Mr. Justice Briggs’ High Court decision in part, holding unanimously that:

There is something positively Dickensian when looking at the anti-deprivation rule (the "rule") and images come up of scribes working in dark and dismal rooms scratching their quills by dim candle light. Indeed, the rule dates back to the nineteenth century and many lawyers would be hard-pressed to explain it even if they are able to grasp the contradictions and fine distinctions thrown up by the old cases. In essence, the rule provides that a contractual provision is void if it provides for the transfer of an asset from the owner to a third party upon the insolvency of the owner.

Why has the Financial Support Direction (FSD) been issued?

In the present fi nancial climate, customers are increasingly asking for business critical software or other assets to be transferred to the customer should the supplier become insolvent, for the legitimate reason that the customer needs security of supply. Two recent Court of Appeal cases remind us that customers who outsource to and contract with potentially vulnerable service providers need to take account of the “anti-deprivation principle” when doing this.

In our September 2009 Pensions update we reported on proposals to make changes to the employer debt regime aimed at assisting corporate restructurings. The final regulations have now been published and come into force on 6 April 2010. Under these provisions, where there is a corporate restructuring and one employer’s assets and pension liabilities are transferred to another, then as long as the prescribed steps (set out below) are followed, no statutory employer debt will arise. Employers relying on an easement will not be expected to seek clearance from the Pensions Regulator.

The anti-deprivation principle provides that “there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and, on the happening of that event, go over to someone else, and be taken away from his creditors”.

Protecting clients’ money and assets has been a pillar of the UK financial regulatory regime. The obligation on regulated entities to “…arrange adequate protection for clients’ assets when it is responsible for them” is enshrined in Principle 10 of the Principles of Business Sourcebook of the Financial Services Authority (FSA) Handbook. The FSA has made rules to protect client money by requiring FSA regulated entities to hold such money in trust accounts (the Client Money Rules).

In September 2009 we reported on the first instance decision in Butters and ors v BBC Worldwide Ltd and ors, accessible here in which the Court held that contractual provisions in a joint venture agreement taken together with termination provisions in a licence of IP rights were void since the effect of those provisions on insolvency was to deprive creditors' access to assets and therefore contrary